Don't rely on financing when building new

Most homeowners think building their own house is exciting -- and it is. But building new also has its surprises. What's the big one? How much it ends up costing.

There's a difference between hard costs and soft costs when it comes to a new build. Contractors talk about the hard costs -- that's the cost of the actual build, things such as material, equipment and trades. They don't usually include taxes in their quotes so you need to add that in yourself.

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UNDATED -- Construction financing is a great tool for building your own home but homeowners cannot rely on advances to cover initial construction costs. HANDOUT PHOTO: The Holmes Group. For Mike Holmes column ORG XMIT: POS1307151857115955

But there are also soft costs, which you don't think about if you've never built your own home. Expenses such as building-application fees, architect fees, engineer fees, municipal permits, soil tests, appraisals and inspections.

And what about the land you're building on? Do you already own it or do you have to buy it? Has it been surveyed? Does it need to be graded? Does it need servicing, such as hydro, gas, or connecting it to a water source and sewer system?

What about the soil? Is it rocky or is it more like clay? Getting the site prepared for the contractor to start building can boost the price another $20,000. I've seen it happen.

Building your own home can get expensive quickly, which is why most people turn to construction financing or construction loans. Some homeowners might even use construction financing if they're doing a major renovation, such as an addition. But construction financing is different from a mortgage.

With a mortgage, you receive all the money you're borrowing from the bank in one lump sum. This happens when you get the title to your property.

With construction financing, most banks don't hand over a bunch of money for you to start building your home: They give it to you in parts at different stages of the build. These payments are called advances, and depending on the bank, the terms of the loan could be different.

The first advance is given to you at the end of the "rough-in" stage -- usually that means the foundation, subfloor, framing, sheathing and roof are done, and all the electrical and plumbing has been roughed in.

The second advance is given at the end of the "drywall" stage -- that's when the exterior is finished, all the windows are in and the heating systems have been installed.

The third and last advance is handed over at the end of the "completed" stage. That's when all the finished interior doors and flooring have been installed, and all the carpentry, heating, electrical and plumbing are done. It's at this point that your house can qualify for an occupancy permit.

A portion of the advance is kept as a lien holdback, in case there are any deficiencies or unfinished work. How much depends on the province in which you live. But most lien holdbacks are about 10 per cent -- in Manitoba it's 7.5 per cent whereas in New Brunswick and P.E.I., it's 20 per cent.

But if the first advance is given only at the end of the rough-in stage, who pays for everything up until that point? You do.

One of the first things homeowners learn about construction financing is that you need your own money to get the project started, which is often a big surprise.

You're expected to cover all costs incurred up until the rough-in stage, including all land costs, costs to get the area serviced, getting the foundation, subfloor, framing, sheathing and roof done, and getting all the electrical and plumbing roughed in. That works out to about 35 per cent of the total cost of the build.

On top of that, some banks will recommend you have another 15 per cent to cover any unexpected costs. So in total, you should have close to 50 per cent of the total cost in your bank account before the first shovel hits the ground. That's a lot.

Building your own home is rewarding but it's also a ton of work. You need to take your time and do it right to avoid a financial and construction nightmare. Construction financing is a great tool. But make no mistake -- it's not a handout. Use it wisely.

Catch Mike Holmes in his new series, Holmes Makes It Right Tuesdays at 9 p.m. on HGTV. For more information, visit hgtv.ca. For more information on home renovations, visit makeitright.ca.

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